Over the past six years, Kenya has posted significant growth in mobile phone financial services – a sector that it has in many ways helped to pioneer – and the medium-term outlook looks equally encouraging as operators move to offer traditional banking products such as savings accounts and loans. With the sector gradually converging with conventional financial services, the central bank is moving to strengthen its regulatory oversight, which could alter market dynamics.
An early success story
Since the launch of Safaricom’s M-Pesa in 2007, Kenya has become a market of reference for mobile phone financial services. A number of other telecoms operators, including Essar Telecom (YuCash), Orange (Orange Money) and Bharti Airtel (Airtel Money), have since introduced similar products – as have operators in several other countries around the continent – which has pushed prices down and boosted subscriber participation.
Kenya counted 23.75m mobile money users as of June 2013, around 75% of the adult population. The value of transactions has steadily increased over the past six years, reaching KSh152.5bn ($1.79bn) in June, and an estimated 31% of GDP is now processed through mobile money services. These systems are used to pay electricity bills, school fees and even to obtain agricultural insurance and microloans.
Mobile money programmes have significantly improved access to financial services. According to the Central Bank of Kenya (CBK), the percentage of the population excluded from financial services (both formal and informal) declined from 38.4% to 25.4% between 2006 and 2013. Moreover, the informal financial sector is playing a diminished role, with 7.8% of the population reliant on these services in 2013, down from 35.2% in 2006.
In an interview with OBG, Njuguna Ndung’u, the governor of the CBK, spoke of the advantages of mobile phone financial services relative to traditional banks, noting that the former provides an efficient and effective means to reach the mass market. “Access to a bank account is limited by a user’s level of income, irregular flow of income and physical distance between the user and a branch. We solved that problem by introducing mobile phone financial services,” he said.
He added, “This has now become a platform, not a bank product, which Kenyans can use for a variety of services, from paying for goods to taking a loan.”
Branching into banking
Indeed, while mobile phone financial services initially were used as simple mechanisms for transferring payments, they have started to move into the territory of more traditional financial institutions.
The earliest examples of this allowed users to access their bank account via mobile phone and deposit money from their mobile balance. However, Safaricom’s M-Shwari service, introduced in November 2012, offers bank accounts that exist solely on the M-Pesa financial platform, without the need for customer affiliation with a branch. Users can deposit money into M-Pesa accounts, and then transfer it between their mobile money and M-Shwari bank accounts, paying a one-time fee and free from minimum deposit requirements. Qualified customers can also access microloans delivered to their M-Pesa account.
The M-Shwari service registered 1.2m active customers by May 2013, generating KSh976m ($11.43m) in deposits and facilitated the disbursement of KSh123m ($1.44m) in small loans.
The success of mobile money in Kenya has been in part due to the light regulatory stance adopted by the central bank at the outset. In 2007 the CBK determined that mobile money providers were not banking institutions; therefore, it allowed operators to enter the market with minimal licensing requirements. This “lean regulation” allowed smaller providers to introduce innovative services relying on the new electronic infrastructure.
As mobile offerings have evolved, regulation has been layered on gradually. The Banking Act was amended in January 2009 to allow third-party institutions to provide services on behalf of banks, and the CBK adopted new guidelines for agent banking. In December 2011 the landmark National Payment System Bill officially granted the central bank oversight over mobile payment systems.
According to Ndung’u, the CBK has developed a firm but enabling legal and regulatory framework that has given confidence to the market while promoting innovation. “We have allowed innovators to innovate, to leverage on technology, to produce the best combination of cost-effective financial services. In sub-Saharan Africa, Kenya is now second to South Africa in terms of financial inclusion,” he said.
However, recently released draft regulations from the central bank aim to raise the bar for participating operators to ensure a healthier and more level playing field. Among the changes identified in the proposed new rules, published in October, new mobile money providers, including both electronic retail payment services and e-money issuers, will be required to undergo a lengthier application and review process with the CBK. The draft also stipulates that applicants must have a minimum core capital of KSh5m ($60,000) for electronic retail payment services and KSh20m ($230,000) for e-money issuers.
The CBK also recommends that all electronic money issuers move toward interoperable systems, to allow money to move between networks and open up the playing field to smaller operators. If passed into law, this measure could have a significant impact on sector competition, as customers would not need to be in the same network to transfer funds.
The proposed rules will be further reviewed after a period of public feedback, which ended October 18. While a greater degree of regulation could slow the innovation that has to date characterised the market, mobile phone financial services have come to play a critical role in Kenya, which in light of the need for financial and client security will likely mean closer oversight in the years to come.